Smallcap Stock To Buy Next Week With Small Equity, But Big Potential To Rally

Sharekhan has a buy recommendation on the stock of VST Tillers and Tractors for solid gains. The company sees a good rally in the stock going forward.

VST Tillers & Tractors: Weak financial performance

According to Sharekhan, VST Tillers & Tractors Q1FY23 performance was weak, driven by sharp fall in EBITDA margin led by raw material inflation and increase in other operating expenses. Despite the revenues grew by 21.9% y-o-y in Q1FY23, the EBITDA and PAT declined 33% y-o-y and 58.1% y-o-y respectively. Net revenue increased 21.9% y-o-y to Rs236 crore, led by 23.6% growth in volumes, partially offset by 1.4% decline in average sales realisation.

Average sales realization improves

The q-o-q improvement in revenues was aided by 8.2% improvement in average sales realisation. EBITDA margin witnessed sharp contraction of 660bps q-o-q to 7.2% in Q1FY23, led by commodity price inflation and unfavourable product mix. The gross margin declined 430 bps q-o-q to 37.4%. As a result, EBITDA and PAT declined 43.5% q-o-q and 54.5% q-o-q to Rs17 crore and Rs 10.1 crore respectively.

Positive outlook

According to Sharekhan, the management has given a positive outlook across its business, with the expectations of a normal monsoon this year and its focus on increasing addressable markets through technological partnerships, launching niche products, enhancing distribution networks and increasing brand building exercises. VST Tillers & Tractorshas maintained its capex spending at Rs. 60 crore for FY23E, for new launches and product developments. The company undertook a 1-2% price hike in July.

Company eyes revenues of Rs 3000 crores

According to the brokerage firm, VST Tillers eyes annual revenues of Rs. 3,000 crore by FY2025, from Rs. 854 crore in FY2022, at an implied revenue CAGR of 52%. "The company has laid down four key strategies to achieve the target. As a company, VST targets to evolve from a power tillers company to an established small farm mechanisation company. The second strategy is to strengthen its leadership in the compact tractor category with greater coverage and a broader range of products," the brokerage firm has said.

New products introduces

"Thirdly, the company focuses on the higher HP segment through its partnership with Zetor. Lastly, the company is developing a precision component business for its Mysore plant, to promote precision in farm mechanization products. The company has introduced new products in FY2021, including the 27-HP high torque compact tractor and a 16 HP power tiller. The 30 HP VST 932 compact tractor has also been launched this year," Sharekhan has added in its report.

Exports remain a key focus area

In the overseas market, the company has an offering of its complete range of VST Tractors and VST FIELDTRAC. VST's focus has been on Europe, Africa & Asia. The company has established a significant presence in Europe with distribution in France, Germany, Netherland, Spain, Portugal, Poland, Romania, Bulgaria etc. The company has over 10% market share in France in greater than 30 HP segment.

Debt free company

VST is virtually debt-free and is expected to generate free cash flows (FCF) of Rs. 100-150 crore annually going forward. In FY23E, the company would have Capex requirement of Rs. 60 crores. The company is expected to grow business with internal accruals. Earnings are expected to grow strongly at 23.1% CAGR over FY22-24E, led by a 21.1% revenue CAGR and a 10bps improvement in EBITDA margin. "We expect VST's return ratios to revert to peak levels," Sharekhan has said.

ROEs to return to 18 to 20%

The company's return ratios are reflective of the cyclical nature of business due to the cyclical nature of farm business and its high dependency on monsoon and government intervention. "We expect the company's ROCE to revert to 18-20% over the next few years. Going forward, VST will be more focused on increasing market share through niche product development, a wider distribution network, and brand-building exercises. We remain positive on the rural economy and expect VST Tillers to be a key beneficiary," Sharekhan has said.